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Mining Bitcoins through your limited company

New Bitcoins come in to circulation through the process of ‘mining’. Mining involves running a program on a high-powered computer to solve a mathematical problem. When the problem is solved a new set of Bitcoins are produced and shared between the miners.

It’s straightforward to start mining your own Bitcoins – all you need to do is run a freely available mining application on your computer. However, this is not a fast-track to endless financial rewards.

The mathematical problems involved in mining Bitcoins are extremely complex. To solve them requires a large amount of computing power and in a cruel twist of fate every additional Bitcoin is more complex than the last, and thus becomes more difficult to mine.

In an attempt to mine coins efficiently, some invest their company’s surplus profits in specialist high-powered Bitcoin mining computers, known as ‘rigs’.

inniAccounts and Bitcoins Please be aware, we are currently unable to offer advice or support with Bitcoin ‘mining’ through a Limited Company. However, if you’re thinking of accepting payments, investing or buying and selling Bitcoin through your limited company – with our highly trained accountants and industry leading software on hand, it’s never been easier. Why not take a look at how we can help your Limited Company?

Taxation when buying a Bitcoin mining rig

Investing in a Bitcoin mining rig through your company is like investing in any other asset: tax relief is available in the form of capital allowances. This means that the purchase of a Bitcoin mining hardware can be used to reduce your Corporation Tax bill – every £1,000 you spend on hardware reduces your Corporation Tax by £200.

However, operating a Bitcoin rig isn’t so straightforward. High-powered computers consume large amounts of electricity and the cost of this energy needs to be considered for taxation purposes. Therefore, once you’ve purchased your hardware you need to decide who will cover the running costs of the rig: you or your company.

Running your mining rig personally

You can cover the running costs personally by operating the rig at home using your domestic electricity supply. In this instance your electricity costs must be paid for personally, and cannot be claimed back via your limited company. The upside is that mined Bitcoins are yours to keep.

However, in order to operate in this way you must account for the fact that you’re using a company asset for personal benefit. You have two choices: either pay your company a reasonable fee to hire the Bitcoin rig, or declare the benefit on your P11D to ensure the benefit is taxed appropriately. Failure to do so would be treated as tax evasion.

Running your mining rig through your limited company

Another method of running your Bitcoin mining rig is to operate it entirely within your limited company. This means your company will pay the electricity costs and the mined Bitcoins become a company-held asset.

Given the high cost of mining rigs there may be an immediate benefit for companies using the Flat Rate VAT scheme. If you spend more than £2,000 (including VAT) on a single purchase of hardware then you can claim the VAT back in its entirety. The stipulation of claiming this VAT back is that you’re not planning on hiring out the rig or using it primarily for personal use.

But the more challenging aspect of operating a Bitcoin rig within your company is the treatment of VAT on electricity. That’s because electricity for domestic / personal use attracts VAT of 5%. However, VAT on electricity for business use (including Bitcoin mining by your company) is charged at 20% – even if it’s supplied by your domestic supplier.

Business owners generally don’t worry about this as HMRC take a pragmatic approach. They state that domestic electricity used for business purposes will attract the lower rate of VAT as long as:

No more than 40% of your domestic energy supply is used for business purposes, and,

No more than 1,000kWh per month is consumed at the lower rate (‘de minimis’)

Bitcoin miners beware: you will quickly outgrow HMRC’s VAT waiver. That’s because average domestic electricity consumption is 390kWh per month, yet A 1GH/sec mining rig typically consumes 450 watts when operating, which is 335kWh per month. Just one high powered rig will push you over the 40% threshold.

Once you exceed this threshold it’s your responsibility to contact your energy company so they charge VAT correctly. You’ll need to complete a certificate with a precise percentage of how much electricity is used for business purposes. They’ll then charge the full rate of VAT on your business usage. It’s up to you to notify your energy company as failure to do so may result in a fine. As a double blow, if you’re using the Flat Rate Scheme you’re not entitled to fully claim for this additional charge.

Finally remember that Bitcoins mined in this way are company-owned assets and must be treated as such. This means that you’ll need to account for gains (or losses) and you can’t simply transfer ownership to yourself without accounting for personal taxes. Find out more about your personal and business tax position in our Bitcoin Tax Guide for UK businesses.

Choosing the right approach

As you can see, deciding on how to operate your Bitcoin mining rig is not necessarily straightforward. For a complete picture you need to consider:

Your personal tax and earnings position

Your company’s VAT scheme, and flat rate percentage

The purchase cost of your rig

The energy consumption of the rig

Your domestic energy consumption

Then also remember that the true business case for mining Bitcoins is a constantly moving target. That’s because the next coin you mine will invariably be more complex and more costly to mine than the last.

Questions and comments about 'Mining Bitcoins through your limited company'

How can we help? If you have any questions or comments you can post them here. We'll aim to post a reply as soon as we can. If you're an inniAccounts client you may prefer to contact your account manager.

Bill BSeptember 29, 2014

What are the tax implications if you personally purchase a mining rig and mine outside of a business as a hobbyist. I have been told mining rigs can only be used by businesses as they are “money making machines” and if you purchase one you are automatically classed as a business. Is this true?

I’m afraid this is a grey area Bill. It comes down to understanding when a hobby becomes a business activity, and HMRC’s rules aren’t particularly clear. HMRC say that a hobby making minimal income is unlikely to be a business, however hobbies do have the potential to grow to become business activities. In order to understand if an activity is a business or not you need to consider if the income is taxable for income tax purposes – not what equipment is purchased. This is governed by The Income Tax (Trading and Other Income) Act 2005, Part 2, Chapter 2, Section 5 which states that “Income tax is charged on the profits of a trade, profession or vocation”. Practically speaking, HMRC would take a dim view if you failed to declare income from mining a substantial number of Bitcoins.

Bill BSeptember 30, 2014

Yes that was my understanding. As most mining is done at a substantial loss initially hoping for the gains on the future price rise of the coin. I would have thought if you mined 1000 coins throughout the year, held them until the price gave you a significant profit, maybe a year or two later, you would only have to pay CGT as an individual. But if you were mining significant amounts of coin and sold them of regularly say every month for a profit this would be considered income and you would be deemed you a business. Therefore it is not owning the equipment that makes you a business but what you do with it. Is that correct?

HMRC Guidance treats Bitcoins in the same way as any other income. The profits and losses of a non-incorporated business on Bitcoin transactions must be reflected in their accounts and will be taxable on normal IT rules.

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